What is a bank's reserve requirement?

A bank's reserve requirement refers to the percentage of deposits that banks are mandated by regulators to hold as reserves and not lend out. This requirement is an essential tool used by central banks to control the money supply in the economy. By requiring banks to keep a certain percentage of deposits, the central bank ensures that banks maintain enough liquidity to meet customer withdrawals and other obligations.

When banks hold reserves, they are not able to use that money for loans or investments, which helps to stabilize the financial system. If banks lend out all their deposits without holding adequate reserves, it could lead to liquidity issues and potential bank runs. The reserve requirement thus plays a crucial role in maintaining the stability of the banking system and overall economic health.

Other options do not accurately define the reserve requirement. The minimum capital a bank must maintain, while related to its overall financial health, refers specifically to equity as a cushion against losses rather than liquidity management through reserves. The total sum available for loans is more directly influenced by the reserve requirement but does not define it. Lastly, the fee charged by banks for managing accounts is unrelated to the concept of reserves and pertains more to banking services and fees rather than regulatory requirements.